(Yicai Global) Feb. 18 -- Elliott Management has come out against the proposed acquisition of Energias de Portugal, in which the US activist hedge fund is one of the largest investors, by Chinese state-owned power firm China Three Gorges.

Elliott Management sent a letter to Lisbon-based EDP's board last week to publicly disagree with the EUR9.1 billion (USD10.3 billion) takeover offer, online news outlet The Paper reported today. The offer is not consistent with the best interests of shareholders, Elliot wrote, and advised the Portuguese utility to follow its advice on how to strengthen the company and make it more valuable.

Opposition from the New York-based fund manager may scupper the prospects of CTG, the world's biggest developer and operator of hydroelectricity, taking over Portugal's largest listed company.

CTG launched a bid to take control of EDP last May in what would be one of the largest overseas acquisitions by a Chinese firm. It bought 21.35 percent of EDP's equity for EUR2.7 billion in December 2011, marking the first time a Chinese business had become a substantial shareholder in a European national power company. It became EDP's largest shareholder last year, with 23.27 percent.

When Beijing-based CTG initially bought into the company, the transaction was considered a precedent for heavily indebted euro-zone economies to sell their state assets to China.

Elliot Management owns 2.9 percent of EDP, placing it among the utility's top 10 shareholders.

Takeover Uncertainty

Elliott Advisors UK has investigated the challenges and opportunities EDP faces, the open letter said, adding that the power generator has great potential and appeal, though it is not in a very good shape at present. The biggest uncertainty is the takeover bid, which greatly undervalues EDP, Elliot said, adding it would destabilize the firm, making it a less attractive asset portfolio with fewer growth opportunities.

Under the takeover plan, China Three Gorges would use EDP as a platform to develop its renewable energy business in Europe. In addition to Portugal, EDP has renewable energy assets in the US, Canada, Mexico, Brazil, Poland, France and many other countries.

The initial offer met with immediate opposition from EDP, as CTG suggested EUR3.26 a share (USD3.69), a 4.8 percent premium. That did not fully reflect the company's value and was also low when compared with other cases in which European public utilities were taken over, EDP's executives said some days later. 

Elliott Management advises EDP to take the actions it recommends to strengthen the firm and make it more valuable by pushing the stock price to EUR4.41 or EUR4.66 a share.

EDP should first consider the key points of sustainable development, optimize its investment portfolio, and refocus on its core businesses, Elliott said in the letter. It said the firm should reduce excessive leverage and refocus investment back on growth opportunities in renewable energies with more attractive rates of return.

Elliott Management also attacked and questioned the details and progress of CTG's takeover plan. It also calls on EDP to raise funds by selling equities of its affiliate in Brazil and its 49 percent stake in a Spanish power utility and other measures, to invest in renewable energy projects with higher rates of return.